Evidence heard in Public

Questions 3069 - 3191



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Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

on Wednesday 30 January 2013

Members present:

Mr Andrew Tyrie (Chair)

Baroness Kramer

Lord Lawson of Blaby

Mr Andrew Love

Mr Pat McFadden

Lord McFall of Alcluith

John Thurso

Lord Turnbull

Examination of Witnesses

Witnesses: Clive Maxwell, Chief Executive, Office of Fair Trading, examined.

Q3069 Chair: Thank you for coming to give evidence this morning. From what I can tell, you have carried on where your predecessor left off on this subject. Your report calls on banks to make rapid progress and to be more proactive in implementing the recommendations that you have already come forward with. How optimistic are you, on the basis of what you have seen so far, that you will get it? For the benefit of Hansard, you were wagging your head from side to side.

Clive Maxwell: I think there are some signs for optimism, such as, for example, around the plans to improve the switching process, where we have seen some improvements over the last few years and we have some credible plans for improving that switching process further. We also know that, over the course of the next year or so, there are some planned divestments as a result of state aid requirements. There are things such as those that you can point to that we would hope to be quite optimistic about. I would be more concerned about some of the cultural changes going on within banks and about their behaviours, approaches and business models, where we are still waiting to see some evidence of change in the way that banks approach markets and their consumers.

Q3070 Chair: Just say a few more sentences about this cultural change that-I think you are implying-we are hearing about, but may not actually be going on. Is that what you are saying or am I putting words in your mouth?

Clive Maxwell: When competition works well, you get providers and businesses focusing on what really matters to consumers and to their customers. They try to improve their service levels. They push prices down and pass on those savings to their customers. You can also have competition working less well in markets. If, for example, the customers in that market do not understand the prices that they are paying or if they do not have good ways to understand the service levels and the quality they are seeing, the competition is not necessarily focused on what those customers want. While we have been trying to improve the transparency of what banks are selling their products for and the way that their service is being delivered, there is still some way to go on that. I am not yet convinced that banks are sufficiently focused on delivering the sorts of products and services that their customers really want, as opposed to finding ways to charge them for things that they do not necessarily want.

Q3071 Chair: You appear to want to keep a referral to the Competition Commission as a threat in reserve. You say that there may be a plan B "if we do not see real change from banks". You then go on to make a specific reference to requiring the break-up of incumbents. Can you just say what you mean by that?

Clive Maxwell: There are lots of changes that could be driven in this market by straightforward financial regulation. We are seeing the FCA taking on new powers. It can think about the way that markets operate in different ways, for example. However, there are some things that a financial regulator would never be able to do and, indeed, the OFT cannot do. One of those is to drive structural change in a market through divestments and breaking up entities. It is something that the Competition Commission has used only sparingly. The best example is the British Airports Authority, where it was felt necessary to break up the market power of an incumbent.

Lord Lawson of Blaby: And the pubs.

Clive Maxwell: And the links between the pubs and their breweries.

If the analysis was that that structural issue was the thing that was getting in the way of this market and that if that was solved, it would make a difference, then that is something that the Competition Commission could do if there was a reference to it.

Q3072 Chair: The pubs case was a so-called complex monopoly, largely created by vertical integration. Here, it is rather different.

Clive Maxwell: When people talk about concentration here, they are typically talking about a horizontal issue, and it is about the number of players in the market. Our most recent analysis has shown that that concentration has, as everyone would have expected, increased since 2008, linked to the financial crisis.

Q3073 Chair: What form would the separation take? You are suggesting a possible break-up of the incumbents, and I am asking you what that would look like.

Clive Maxwell: If the Competition Commission were to go away and look at this and if they had a reference, the sorts of options that would be on the table-if they thought that sort of structural change was the right thing to do-would be both vertical and horizontal. The most obvious option for them to consider would be a horizontal chopping up of the banks-in the same way that the state aid divestments are requiring-which is to take out certain bits of the businesses and put them under different sorts of ownership. You might, therefore, create businesses of a certain size that could be credible competitors in the market. We know that there are significant start-up costs and fixed and sunk costs with establishing a bank. We would overcome some of those barriers to entry by creating those sorts of rivals. That would be one way of doing it.

It is interesting to look at the pubs example and to ask whether there are forms of vertical separation that could be looked at in this sort of market, or other sorts of arrangements that could be put in place. Andy Haldane made some suggestions about, for example, requiring the existing banks to make available some of their infrastructure for other rivals to use. That would also potentially overcome some of those barriers to entry. As I have said, those will be questions for the Competition Commission to think about if they were to look at this issue.

Q3074 John Thurso: May I just pick up on what you have just said there? If I have it right, you could envisage a system where you had suppliers of the back-of-house function-all of the IT systems-which might have several banks that were clients, but the retail offer and the whole banking and the balance sheet would be run by the particular bank, and that would allow more people to operate greater competition and take one of the barriers out.

Clive Maxwell: You could envisage that. Whether that would be the right thing to do, I do not know. There are two elements. When we did our work on barriers to entry in banking two or three years ago, among the barriers we found were the importance and cost of IT systems and setting those up. It is not just the fact that they are fixed costs, but the fact that they are sunk costs. If you set up a new bank and sell it to someone else, they will almost certainly scrap and write off that IT cost-it is a big sunk cost. If you can find a way of dealing with that cost, there is an issue.

The second area that was significant was around the costs and practicalities of a branch network. Despite the fact that internet and even mobile access to personal current accounts has increased very rapidly over the past few years, access to a branch is still something that the majority of customers want. If you want to have a large-scale presence you need a large-scale branch network to go with it. I mention it because it is possible to imagine having access to branches as well, as part of the infrastructure that you would want to see.

Q3075 John Thurso: I want to come on to the speech that you made on 20 June in which you said that the lack of customer focus on the part of the providers is one of the key underlying reasons behind the lack of competition, innovation and efficiency in the sector. Why is this consumer focus, which is present in so many other sectors of the economy, so absent in retail banking? What is the impact on consumer outcomes?

Clive Maxwell: I will give you some possible explanations. One is the fact that you are dealing with a group of consumers who find it difficult to understand the products and the services that they are being offered. Some of that stems from the way that they are described and presented, but it also stems in part from consumers’ innate financial literacy or capability. It makes it more difficult for them to engage and therefore more difficult to hold providers to account. There is something about some aspects of these markets and their complexity that makes it easier for businesses perhaps to seek other ways to recoup costs and to push up costs and charges rather than focusing on what consumers most want. If you are selling very simple retail products to customers and they engage in those products-buy them every week-they will not buy them again if they do not like the quality. If they do not like the service, they will not go back to that shop. There is something simpler about that that forces a retailer like that to have that relationship with their customers.

Q3076 John Thurso: Interestingly, all the banks’ evidence more recently accepts that there is a lack of consumer focus and they say that they must change that. I am interested in your analysis on how they got to that place. The danger always is that everybody says we have to do x now, but 10 years down the track, when memory has faded, they all go in a different direction. This is the opportunity to entrench a shift. What do you think it is that made them go down that route?

Clive Maxwell: This is a somewhat circular argument here, but it also links back to that lack of competition and the fact that they have not felt it necessary to engage with their customers.

Q3077 John Thurso: It could be as simple as because they did not have to compete, why bother with the customer?

Clive Maxwell: And indeed the fact that they can find other ways to impose charges and costs and things, growing their revenue without going to compete in that way.

Q3078 John Thurso: Just one other quick point from your submission, where you highlight that competition is very weak. You go on to say that the other area where standards can suffer is where there is intense competition. Could you explain how intense competition could lead to a deterioration of standards? It seems slightly counterintuitive. I would have thought that good, strong competition would have led to an increase in standards.

Clive Maxwell: In general, the OFT believes that competition typically drives up standards and quality of services and drives down prices. The risks are where those individual consumers find it difficult to understand and assess quality in different sorts of ways. So if providers can cut corners in some sense or sell products that are not optimal for those customers, there is a risk that those customers cannot hold them to account for that sort of problem in the marketplace.

Q3079 John Thurso: So the risk is that if you have a small number of people in the market competing intensely, they just reinforce the bad aspects of the products they are all selling?

Clive Maxwell: Yes, and it is the fact that what they are competing on is not about trying to satisfy their customers’ concerns and needs. They are competing, in a sense, amongst themselves to find other ways to extract revenue.

Q3080 Mr Love: In a report you did in 2010 on growth in retail banking, you identified customer inertia and low levels of switching as barriers to greater competition. Do you think that the seven-day switching service that has been proposed will address those issues? Do you think we need to go further and perhaps look at account portability?

Clive Maxwell: The new service that has been proposed could make a big difference. Having a formal commitment around seven days and making sure that the rate of errors and so on drops markedly will be very important. Publicising the way it operates will be important. There is a bigger issue about perception of the difficulties of switching. Our analysis shows those concerns about switching are greater than they ought to be, when you look at the actual experience of people going through the switching process.

Q3081 Mr Love: So how should we assess whether or not the seven-day service is a success or not?

Clive Maxwell: You need to look not only at the experience of the people who switch and whether they have suffered any problems, but also what the perception is about the ease of switching amongst other people. So carrying out consumer surveys and the like to understand how concerned people are will be an important part of that. In terms of account number portability, which is another proposal that has been put forward, I know a lot of comparisons are drawn with telephone numbers. There are some genuine differences between who needs to know about somebody’s telephone number and who needs to know about somebody’s bank account. I am not sure that the case is as strong for number portability in the case of bank accounts as it was for telephones.

Q3082 Mr Love: We have received evidence from the industry saying that it is highly complex, very expensive and will take a long time. Other experts in this area say that they are over-egging the complexities and costs. Where does the OFT come in? What is your view?

Clive Maxwell: What I have not seen is a serious piece of analysis that sets out those costs. We have pressed the Payments Council to do that most recently and I would like to see the numbers setting out those costs and benefits.

Q3083 Mr Love: Would it be appropriate for the Payments Council, which is dominated by the industry itself, to come up with that? Should it be an independent report?

Clive Maxwell: I would hope that if that sort of work is done transparently so that everyone, including bodies like the OFT, can look through the numbers and everything, that ought to offer some reassurance. It will come down to how well it does that work.

Mr Love: Don Cruickshank gave us evidence earlier and was obviously speaking up on behalf of Paycom. He made the point in relation to the payments system still being in the control of the banking industry. Is that a concern for the OFT and what steps do you think need to be taken to ensure that new and challenger banks have equal access to the payments system?

Clive Maxwell: The Payments Council is in a better place than it was. We could see some further improvements around its governance. I personally think there is a case to think about whether a payment regulator would bring some benefits, perhaps not for the very reasons that you mention. When we look at payment systems we see perhaps three concerns. There is first of all the access to the payments network for new banks. I know this is raised as an issue. Our own work on barriers to entry suggests that it is not such a significant issue in the way that new entrants come into the market. They can find ways of accessing it. That is not to say that it could not be done better, but there are ways of doing it.

The second concern is about levels of innovation in the payments infrastructure. The UK has historically lagged behind other developed and developing countries in the way that its payments infrastructure has been developed. I think that comes in part from the fact that you have a rather more closed club controlling the way that those systems develop. The third thing is around pricing in those networks. It is very difficult for competition authorities to get a grip of those pricing sorts of issues. In other markets where you have common utility systems, it has in the past been thought necessary to have pricing type regulators to look at the prices in those markets. There is certainly an open question in the payment system about whether that sort of approach may be necessary in future.

Q3084 Mr Love: The Government’s recent report on the payments system was unenthusiastic about a Paycom regulator. You don’t seem much more enthusiastic, yet the benefits could be substantial. I won’t list them, but they are listed in the Treasury report.

Clive Maxwell: When I look around the world, competition authorities either have taken or are engaged in taking action, looking at all sorts of payment systems. There are some common characteristics, in that they tend either to be monopolies or very concentrated markets. Sometimes the structure of those payment networks and systems means that there is very little control over the costs and the prices involved in them.

Using competition law to tackle those problems is a possibility and it has been done successfully. But you still end up with questions about what is the right sort of price to set in some of those markets. The sorts of skills that a price regulator would bring might be a way of looking into that.

Q3085 Mr Love: Let me ask you this finally. Andrew Haldane has come before the Commission on several occasions and talked about a platform. Do you see any merit in that and how do you think the industry should react to the proposal to have a shared platform?

Clive Maxwell: There are two bits to that platform. The first is what you think of as that central infrastructure where there is, in a sense, only one version of it. The second are the sorts of infrastructure that go on within banks. I think there is a bit of an overlap between your question and Mr Thurso’s around what is part of that central infrastructure.

My worry about having only one system is that you come back to some of those concerns about competition again and you will not necessarily get innovation of things taking place. You almost certainly then would need to think about who is setting the price in a market like that, who is setting the price for new entrants to come in, the access rights and things. So I don’t think those regulatory type questions go away if you have a single system like that. Indeed, they may be increased if you don’t have competition going on. That said, there may well be benefits if that can reduce some of the barriers to entry to new businesses coming into the market.

Q3086 Chair: Have you taken any technical advice as a Commission on the platform issue?

Clive Maxwell: We looked at some of those sorts of platform-type issues as part of our barriers to entry where we did not take any very technical advice. We have talked to businesses involved in the supply of IT systems to banks to understand what some of the issues are.

Q3087 Chair: But you have given thought to the range of options that might be available-enough to be able to answer the question in the way you just have.

Clive Maxwell: I can answer it at the level I have answered it now. We have not gone into this in huge amounts of detail.

Q3088 Mr Love: There are huge variations between what the industry believes a platform will cost. Have you done any work to have an order of magnitude?

Clive Maxwell: No.

Q3089 Lord McFall of Alcluith: The dominance of the big four and five banks in the UK does not seem to have any hope of being broken on that. You did a report on barriers to entry in 2010. What did you identify in your report that we can take hope from?

Clive Maxwell: The report in 2010 identified those barriers. In particular, it found that, to be a successful competitor in the market, you needed to overcome certain barriers to entry. The most significant of those were the start-up costs arising from IT, the need for a branch presence and the need to grow your customer base rapidly enough to cover those sorts of costs in a market where the customers are inert and where the total number of customers changing business each year is very low.

That is also made more difficult by the fact that the pricing behaviours of the incumbents make it potentially even more difficult to take those customers, in the way that they can use their back book to cross-subsidise the offers that they offer to new customers. That is the summary about where things stood; they were the key concerns.

There are some technological changes, as well as the things that I talked about earlier, which might offer some hope. Mr Tyrie asked about the information that we had as part of a study, and we had advice from IT providers that we were seeing the development of new types of IT products that would allow banks to buy their systems incrementally, as it were; they would not be forced to pay a huge sum up front but could, instead, buy something and start to expand it over time.

Q3090 Lord McFall of Alcluith: That is a big issue.

Clive Maxwell: That is the sort of technological development that might take place here. Personally, I think that some of the other sorts of developments that we will see around non-banks coming in and taking customers off banks is the sort of business development we should be looking at and thinking about. Certainly, if I was running a bank, that would worry me as much as the likelihood of other banks taking my customers.

Q3091 Lord McFall of Alcluith: Your predecessor, John Fingleton, gave a speech in which he stated, "It is important that regulators do not unduly constrain competition by taking the business model of incumbent and traditional banks as the starting point for the design of new rules in ways that could disadvantage new technologies and innovative providers." Is there still evidence that the FSA’s approach discriminates against such providers? If there is, how can we get around that problem?

Clive Maxwell: I have not seen many actual examples of that being a problem. The area where I have heard arguments about that being a problem is around capital requirements and whether the requirements on new, inexperienced banks are disproportionately high compared to those on the larger, well-established banks. There are debates to be had there, but I have not had specific examples given to me.

There are questions, though. I know that you took evidence from peer-to-peer lenders, and businesses like that could be in competition with banks but they do not find themselves under the FSA’s regulatory ambit. Strangely, that is a group of businesses that is clamouring to be regulated, as I understand it, because they want the quality mark that goes with that. There is something about thinking about regulation broadly enough to make sure that they are being captured.

Q3092 Lord McFall of Alcluith: You talk about business models. Is it the case with the big banks that we have seen diversification but not diversity? I am thinking of products such as PPI-I am leading a panel on PPI-which is a problem that has been flagged up since the ’90s, and the OFT have been involved. But 19 years later the number of complaints, as illustrated by the FOS just yesterday, is at a record high.

How can you play your part in stopping anything like PPI from happening again? Can you act quickly? I look for reassurance that action will take less than a generation.

Clive Maxwell: On the market issues in PPI, I would hope that, if similar issues came up now, we would act faster on them. If you look at the speed at which the OFT has made market investigation references over the last couple of years-in the motor insurance sector, for example-you see that we are able to act rather more speedily on something like that. I would hope very much that, in the future, the OFT or the Competition and Markets Authority would be able to do that.

There is also something there about what I would call horizon scanning-looking out and seeing the problems that are emerging. I would say that there is something there about identifying the business models that firms are using and paying more attention to those than has been the case in the past, perhaps.

Q3093 Lord McFall of Alcluith: Finally, Sir Brian Pitman, a former chairman of Lloyds, now deceased, appeared before a commission that I was on. He made the point that incentives for sales targets have been a large part of the problem. It is a little short of crazy to incentivise people to maximise the number of loans that they are going to grant. From your perch at the OFT, would you agree with Sir Brian?

Clive Maxwell: Quite possibly, yes. Most of those issues are for a financial regulator to look at. They need to look at the bad behaviour of the firms. But if those things are distorting behaviours and the way in which competition is taking place, in the way I mentioned up front, then, potentially, yes.

Q3094 Lord McFall of Alcluith: The reason why I ask is that, although it is for financial regulators to look at this, we have seen a segmentation of responsibilities, with no one taking responsibility at the end of the day-hence the 20-year cycle. Do you agree?

Clive Maxwell: It is disappointing how long the whole thing has taken.

Q3095 Lord Turnbull: There are two divestments going through: one is Lloyds to the Co-op. RBS failed with Santander, but it is looking at it again. When those divestments are completed, what will the degree of concentration be, compared with the position at the start of 2008? Will we have fully reversed that, or do we still have a long way to go to reverse it?

Clive Maxwell: I have not got the numbers in front of me. I can go away, calculate them for you and let you know, in a mathematical sense, where they stand. In part, it depends on who the divestment sales are to and how credible they are as competitors in the market.

When the OFT looked at the market in 2006-07, and looked at the way it was then, it looked not just at the concentration indices, but also the presence of what it saw as a second tier of banks. It had some evidence to the effect that that second tier of banks were up for the competition and up for the challenge. There was something about the way they were pricing products and going into the market that gave the OFT that view. So, in part, this is a qualitative judgment about who the people are. The ICB, in looking at this, said that they thought that the divestment had to be of a certain size, and I believe the ones that are being considered-the ones you talked about-are that sort of size.

Q3096 Lord Turnbull: Were you treating HBOS as one of the challengers or one of the-

Clive Maxwell: At the time of the OFT’s previous work, it was one of those challengers.

Q3097 Lord Turnbull: A lot people will think that, if this is implemented, that is fine, and it may take a lot of the heat out of things. But people will still be left with a pretty poor choice. In terms of the amount of switching that will take place, people may ask, "Why should I switch from this bank, when my friend tells that that bank is not really any better?" Unless you resolve the real competition, and not the, in a sense, fake competition, which we are talking about, this is not really going to deliver the results we want, is it?

Clive Maxwell: It comes back to whether the new banks, or the banks that take on the divestments, are interested in being serious rivals and offering something different in the marketplace.

Q3098 Lord Turnbull: Isn’t the problem with divestment also that, to get the branches and avoid cost problems, you often end up borrowing, for a time at least, the IT system of the people you have bought the branches from?

Clive Maxwell: There are certainly significant practical issues about how you take on those sorts of divestments.

Lord Turnbull: I just want to add that I worked with Clive 12 years ago on a problem that seems to be absolutely back again-petrol prices and incipient public order issues. I hope you can solve it as quickly as you solved it last time.

Q3099 Lord Lawson of Blaby: Mr Maxwell, I would like to direct your attention to a particular area of potential barriers to entry. In your list of barriers to entry, you did not mention explicitly free-in-credit banking. In the hierarchy of barriers to entry, where do you place that?

Clive Maxwell: About halfway down, I should think. First, I do not much like the term "free-in-credit banking". Our analysis shows that banks earn considerable revenue from people, even when they are in credit, so I do not think it is a terribly good descriptor of how that market is working.

For the most part, firms should be free to set prices in markets in the way they want to. If they choose to offer certain things for free and to cross-subsidise other aspects of their products, that should be a matter for them primarily. Where this is potentially an issue is the ability of incumbent firms to use their back book to cross-subsidise extremely good deals to that small minority of customers who are switching.

That makes the challenge all the more difficult for new entrants into that market, because they do not have a big back book of customers. It is highly likely that the customers they do have are the ones who move around, and also that they simply do not have that many customers if they are new and small. I think for me that is where the slight worry-the main worry-is.

Q3100 Lord Lawson of Blaby: Listening to the first part of your answer, am I right in concluding that you would see no case for the OFT? I know you have a cavil about the phrase "free-in-credit banking", but it is used by very eminent people such as Mr Andrew Bailey, whom God preserve. It seems to me that you are not in favour of a ban on free-in-credit banking.

Clive Maxwell: I would not be right now, no.

Q3101 Lord Lawson of Blaby: Right. That deals with that. Moving on to the next related issue, because it is related-

Clive Maxwell: Can I mention one other point? I think sometimes there is a link made between the fact that banks offer free-in-credit banking and the fact that they are driven to do other things which people do not like, such as the way they charge for other products or try to sell many other types of products to those groups of customers. I am not particularly convinced that if you were to force them to start charging for some current accounts, those other behaviours would necessarily stop. I do not see a direct link between the two.

Q3102 Lord Lawson of Blaby: Nor do I, but may I press you a little on that issue? Do you agree that there is in fact a distinction between cross-selling and mis-selling?

Clive Maxwell: Oh yes.

Q3103 Lord Lawson of Blaby: None of us would favour mis-selling, and you would come down on it like a ton of bricks insofar as you have the power to do so?

Clive Maxwell: Yes.

Q3104 Lord Lawson of Blaby: Do you see anything improper about cross-selling? Incidentally, it is, of course, widespread throughout commerce; it is not peculiar to banks.

Clive Maxwell: No, and indeed typical retailers will not price every single item at the marginal cost of that product, and all that sort of thing. I see nothing wrong with cross-selling in principle. I think there may be some social concerns if you have certain groups of consumers paying more for certain things than others, but that is not primarily an issue for me in the OFT. There is, however, an issue if the form of that cross-selling is creating or emphasising certain barriers to entry.

Let me give you an example. If you had a firm that had 95% of a market, and it was able to use its back book of customers, so that every time a customer was thinking of leaving it could offer that particular customer a really, really good deal to stop them leaving, and cross-subsidise that with its back book, and that prevented any other business from getting into the market, that might be something a competition authority would have concerns about, because it was posing such a big barrier to entry. That would be a form of cross-selling, potentially.

Q3105 Lord Lawson of Blaby: But surely if that were the situation, would you not say that this was merely a symptom of the main problem-that this firm had 95% of the market?

Clive Maxwell: It comes from having that position in the market, yes.

Q3106 Lord Lawson of Blaby: And there might be other things that would come from that. So you might wish to address the problem of its having 95% of the market rather directly?

Clive Maxwell: You might, but without that sort of cross-selling going on, you might be rather more relaxed about the 95%. So you can look it at from both ends.

Q3107 Lord Lawson of Blaby: So what would you suggest doing, supposing you did find that going on? What would you recommend?

Clive Maxwell: We would look to see whether that was being done aggressively to prevent somebody else from coming into the market. If it was, depending on the nature of that market-if you are talking about a single business that is potentially an abuse of a dominant position. That was the example. That is not quite what we are talking about here for banks, because we do not have a single player of that sort of scale in the market. It was just an attempt to illustrate the fact that certain types of cross-selling in some situations might contribute to barriers to entry.

There is one other characteristic that facilitates this cross-selling, which is the fact that these markets have become more fragmented in the sense that banks can offer many different sorts of deals to customers. Again, that is typically a good thing. If you contrast it with some other sorts of products in the market, where a retailer stocks one product, and it charges everyone who buys it the same price, it is much more difficult for it to try to cut deals to keep its customers loyal. They have to offer the same benefits to all their customers at the same time.

Q3108 Lord Lawson of Blaby: You have been very clear, so may I ask one last question? In the light of your analysis, is there anything you would like to see done, and if so, what?

Clive Maxwell: Gosh!

Chair: You have published a paper on that; it could take a while.

Clive Maxwell: We have set out some very particular recommendations to banks to continue to improve transparency, and to improve the control consumers have over their accounts, which, even if it doesn’t mean that they switch around more, does mean that they get better value out of the accounts they already have.

We would like to see serious progress made on the switching arrangements; we will wait and see quite how much of an improvement that leads to. We look to see those divestments that you raised take place and see what effect they have on the market.

Chair: We are very pleased that you are sitting on the same analytical ground as the Treasury Committee in its report on retail banking competition, as you know.

Q3109 Baroness Kramer: Mr Maxwell, I want briefly to ask you two questions wrapped into one, because we are under time pressure. They are both quite small questions.

On the free-in-credit issue that you were just discussing, you mentioned transparency, which you stressed in your report, but we still cannot see on our bank statements how much money the bank is making from the float on current accounts that are supposedly free. Do you see that arriving on bank statements any time in the near future, so that people can see what they are actually paying? I know that you have done a very good job on fees.

Clive Maxwell: We will be working with some banks to trial that. We will see how easy it is to do, technically, and also start to see whether we think consumers can draw any benefit from it. I have to say that some of the discussions with consumer groups are not entirely supportive; there are arguments that consumers will misunderstand the interest forgone-type numbers as being actual charges and fees that they are paying.

There is an issue about how best to explain those sorts of things to consumers. It is also notable that in other markets you do not typically have the suppliers of the products showing how much money they are making on a product. You simply show the price that the consumer is paying in cash terms. If you were to introduce that, I think that you would need an element of consumer education to go with it, to help them to understand it better.

Q3110 Baroness Kramer: Would you agree that the term is not always "free-in-credit banking"-we may use that, but "free banking" is the general term that the public use. Is that not misleading advertising? I am sure it is not used in a formal advertising sense, but it is a misunderstood concept.

Clive Maxwell: It is. Even leaving to one side the interest forgone-there is a question about how best you should describe that-consumers are typically paying other sorts of fees and charges, at least in some cases, for their accounts.

Q3111 Baroness Kramer: If I could just ask you about a very narrow issue, you talked about the importance of seven-day switching and how it effectively works. In your report, you pick up on the issue of who will pay the cost of this new service. At the moment, switching is divided between the bank that loses the customer and the bank that gains the customer, and it is a relatively low charge. Could you just elaborate on that concern?

Clive Maxwell: I am afraid I am not completely up to speed on where some of the detail of that has reached, but you clearly wouldn’t want those costs to be a barrier to new firms coming in if they were the ones who had to pay up front to use the switching service. You would certainly want the charges to be spread more equitably across the market.

Q3112 Baroness Kramer: You say in your report that "the OFT would have concerns over fees from this service being borne wholly by the new bank unless a very clear justification for this approach can be provided". Do you know where we are on that?

Clive Maxwell: I don’t, I’m afraid. I can find out and get back to you, if that would help.

Baroness Kramer: That would be much appreciated.

Chair: Thank you very much for giving evidence. We may want to come back to you, possibly in writing, for clarification on a number of points, since this is an area-the relationship between standards and competition-that is of considerable concern to the Commission. Thank you very much indeed.

Examination of Witnesses

Witnesses: Gary Hocking, Chief Operating Officer, Payments Council, and Adrian Kamellard, Chief Executive, Payments Council, examined.

Q3113 Chair: Thank you very much for coming in this morning. The OFT told us that the Payments Council’s decision to consider the abolition of cheques raises question about the extent to which consumers’ views are reflected in the Payments Council’s governance. Do you agree with that?

Adrian Kamellard: I have been at the Payments Council for a year and a quarter now. The reason I joined was to-

Q3114 Chair: Sort this out.

Adrian Kamellard: Yes, absolutely. What I have been doing in practice, with the support of stakeholders and the board, is to overhaul the Payments Council. Front and centre, the way we work means that we start with the customers and the economy. We have the policy makers, the regulators and the industry. So we have four constituencies.

Q3115 Chair: That is the way you are working now?

Adrian Kamellard: Yes.

Q3116 Chair: Is that what you felt you inherited?

Adrian Kamellard: It is difficult to say, because I was not on the ground at the time. From speaking to stakeholders, it was very clear that they were not confident about the way decisions were being made. What we have aimed to do over the last year in the way we make decisions and commission work is really to try to engage stakeholders. For example, with this session today-and I really do appreciate the opportunity to come-my aim is to say to you that the way we are working now does serve customers, and the way we commission work will overcome the concerns that were expressed in the past.

Q3117 Chair: It would reassure us that you are really on the case if you would give us an explicit and frank description of what was wrong with the outfit you inherited. I have not heard that so far. Of course, I want you to tell us what you really saw.

Adrian Kamellard: When I came into the council, the most current discussion was the decision about cheques, how we got to that point and what had gone wrong in that decision making process. There had been a lot of engagement with stakeholders about the principle of it. My take on it is that there was an inability to see the wood for the trees. Cheques are a very tangible means of making payments. They are critical to major segments of our population. They are, by definition, along with cash, the most tangible way of making payments. To remove that without really understanding the consequences gives rise to substantial concerns. There was a need to step back and understand the impact that would have been felt in all segments of the community.

In the way we are working now, I am pretty confident that a decision like that on cheques would not be repeated. Lessons have been learned about the way to look at a problem and the way to engage with people before making a major decision about payments, particularly when something is being turned off, as opposed to being turned on.

Q3118 Chair: Was this inability to see the wood for the trees part of the culture of the Payments Council that led to these bad decisions? I think you agree the cheques decision was a mistake.

Adrian Kamellard: Indeed. I was very clear that it was absolutely right to reverse that decision. It is absolutely right that every significant change to payments systems that will have an impact on the way that consumers use it must get the support of all four constituencies.

Q3119 Chair: The reversal would not have happened without pressure from Parliament, would it?

Adrian Kamellard: It is very clear that the pressure from Parliament was critical in that process. My view on this is that it is healthy to have Parliament and policy makers actively involved in these discussions. Payments are the lifeblood of the economy. I see few circumstances where there is a material development, where it is not constructive to have a dialogue about what policy makers want to see of the payments system. I am aiming to engage with stakeholders systematically, regularly and constructively.

Q3120 Chair: We are not a stakeholder. We just hope that you run the show in a way that is effective enough not to require interventions from Parliament.

Adrian Kamellard: Indeed. If you look at the way that we want to develop a strategy for the industry, one item I referred to in a letter I sent to you recently was something called the payments roadmap. That will lay out clearly and transparently how the industry should be developing over a two-year, five-year and 10-year time horizon. In developing that, it is really important that we get stakeholders involved in the process; not just commenting on final version, but involved in the debate on the key features and functions coming through the payment system over that time period.

If we get that right, and I am determined that we do, you are right that Parliament will not have to come back and say: "You have it wrong". I want to be able to come before you to say that we are getting the right decisions and you are persuaded we have done it in the right way and made the right calls.

Q3121 Chair: I am not doubting your sincerity but you will understand there is some scepticism in Parliament when we hear from banks and from those who are working very closely with banks that there have been huge mistakes in the past but it is all okay now.

Adrian Kamellard: I do not want in any way to come across as being complacent; it is hard work to get this right. If you are looking at serving those four constituencies well and aiming to effect significant change-because there is no doubt that over a 10-year or five-year period there will be substantial change-you have to work very hard to get alignment. Going into major discussions, you won’t immediately get alignment. There is not an automatic alignment of objectives or concerns. It is going to be regular and constant hard work to get to the point where we have the evidence, the data and the engagement so that people are persuaded to make the right calls. It will remain that way as this work progresses.

Q3122 Chair: There are millions of people-often elderly and vulnerable people-who were told that they were going to have their cheque books taken away. And there are thousands of charities who rely on paper-based donations. This was pretty serious, wasn’t it?

Adrian Kamellard: It was really serious. The thing that-

Q3123 Chair: It is helpful that that is acknowledged; that is all we need.

Q3124 Mr McFadden: The proposal for seven-day switching-this is presumably a major effort now to get this right and put all the systems in place?

Adrian Kamellard: It is.

Q3125 Mr McFadden: I would like you walk me through how this will work for a current account holder. Let’s say I have been with my current bank for years, maybe decades, and I decide to switch. First of all, will that mean that my account number and sort code have to change?

Adrian Kamellard: If you will bear with me, I will break that question into two parts. Gary can answer with great precision the question of process but it is worth adding some context. When you are arriving at that decision, you as a customer will see several things.

First, when account switching goes live, there will be a mark-you can call it a trade mark or a kite mark. We want to associate account switching with a recognised symbol where people can say a current account is promising a certain level and quality of service because it has this kite mark associated with it.

The second thing you will see is a plain English guarantee; a promise as to what will happen. It will be a smooth service and, if anything goes wrong, it will be put right.

Thirdly, you will see a way of working which says that when you want to change your account, you go to your new bank and go through the necessary customer process. You say to your new bank that you want to switch from your old account and you agree the date on which the switch will take place. At that point, as a customer, you just sit back. You have nothing more to do. On the agreed date, all standing orders, direct debits will move over to the new account.

Q3126 Mr McFadden: I just want to be really precise about standing orders and direct debits because I suspect that is in a lot of people’s minds. They think, "I might do this, but I’ve had these direct debits for years: money in and money out." Really tell me how this works from the customer’s point of view.

Gary Hocking: As Adrian has said, the customer needs to do nothing more. The customer agrees a relationship with a new bank. They agree between them the date on which the switch will take place and then between the two banks all the standing orders, direct debits and direct credits are automatically moved from the old bank to the new bank. No more customer intervention is required.

Q3127 Mr McFadden: I have set up a direct debit with, say, my employer. I have given my employer my bank details so that my salary is paid into a particular current account. How does this work if I have then moved from bank A to bank B? How does new bank B get my salary paid into the new account? I really want to understand this.

Gary Hocking: Because the old bank A has told new bank B all of those details and passed them automatically across through the engine that we are building so that new bank B can then call the money from-

Q3128 Mr McFadden: But my employers still have on their records the account number and the sort code for old bank A where they send the money every month. How do my employers know to send the money to new bank B?

Gary Hocking: They will receive an automatic message to say that the customer’s details have changed. Because the customer will be sensitive about their salary, they will probably also have told their employer that they have changed their bank details. Even if that were to fail, the payment would still be automatically redirected from the old to the new account.

Q3129 Mr McFadden: What about money out? People will have multiple direct debits to pay utility bills, council tax and all sorts of things. People’s hearts would sink at the thought of having to tell all those places, and you would forget some of them as well, because some are annual, some monthly. There are ones that always surprise you every year. How is that going to work?

Gary Hocking: The same applies. The old bank has a record of all those direct debits and standing orders. It passes that record to the new bank and the new bank then takes control.

Adrian Kamellard: In general, there has been a lot of work done on the service features from the consumer’s point of view. We did quite a lot of work with focus groups and other research. What makes the difference, and is the critical thing, is that everything is characterised as being simple and hassle-free. The key thing for the customer is that once you have told your new bank that you want to change, you need to be able to sit back and do nothing more. When it comes to September, I will be switching myself, so I will be testing this in the flesh and I am expecting that, once I have given that instruction, I will do nothing more.

Q3130 Mr McFadden: People will think there is quite a lot of capacity for this to go wrong, precisely because people have got multiple direct debits. They are probably more worried about money out than money in, as that is usually just a salary. How are you going to reassure people about what you have just explained to me, that for them it is just a matter of walking in? They don’t have to remember all the different people they are paying direct debits to or the different ways they might be getting money. They may, for example, be getting child benefit as well as their salary.

Adrian Kamellard: Gary can add if I miss key bits. In terms of the reassurance, the first is that there will be a simple guarantee. If you compare and contrast this to direct debits, one key feature of direct debits that helped their success is a very simple guarantee, which was published alongside the brand, so people were confident in it. It would be a similar sort of promise in these circumstances.

The other is the communications campaign that we will launch. We are going to run a central communications campaign, entirely separate from any financial institution. It will use television, the press, social media to publicise the guarantee and the brand, and it will use imagery to get across the simplicity of the process. That is to inspire confidence initially in the process and encourage people to try it.

We will look closely at two key metrics. One is awareness levels, that is the fact that this service exists and is different. The second, critically, is satisfaction levels. If there is anything in the customer experience that falls short, we will spot that and put it right. The aim, through automation, service design and the guarantee, is to create something with very low errors.

Q3131 Mr McFadden: So, will the banks, collectively, through you, I guess, pay for an advertising campaign? Should we expect adverts on TV and all of that?

Gary Hocking: That has all been agreed.

Q3132 Mr McFadden: When will that be live?

Adrian Kamellard: We have modelled a multi-year advertising campaign, with an unsurprising focus on the first year. The service will go live in September and there will be some publicity around that. We have already identified that people tend to make this sort of financial decision in the new year, as a new year’s resolution. There will be a particular push after the first Christmas to describe the service and raise levels of awareness.

Q3133 Mr McFadden: How will you judge whether it has been a success?

Adrian Kamellard: As I said, the two key objective measures will be undertaking surveys to test levels of awareness and consumer satisfaction. In more general terms, the softer measure is whether you observe a greater range of competitive products and challenger banks taking advantage of this opportunity to make a firm push in the market. We are certainly seeing good evidence that challenger banks are specifically using this service as the opportunity to invest in the market.

Q3134 Mr McFadden: Is there not a slight conflict of interest built into this, in that you are judging success by the number of people who move? Four or five big banks currently have 80% or 90% of the current account market. They do not really have an incentive to be ushering their current account customers out the door, do they, because that is the foundation stone for selling people mortgages and everything else?

Adrian Kamellard: The obligation to meet the service level in switching is absolutely clear. There is no room for backsliding, in terms of the efficiency, speed and quality of the service. I have seen no evidence at all with banks, whether large or small, in terms of their strong appetite for supporting the service and making a success. Hand on heart, I have been in no discussion. Obviously, I am not party to the discussions at individual branches, but there has been really good pan-industry support for making this service a real success.

Mr McFadden: We will see how it goes.

Q3135 Baroness Kramer: I have one last follow-up question on that. I raised the issue with the OFT. At the moment, where is your thinking on where the cost of making this switch will fall? Will it only be on the new bank, in which case challenger banks have a real cost hurdle for every new customer they take on, or will this follow closer to the current model when that cost is shared?

Adrian Kamellard: Gary can describe exactly where we are in terms of cost-sharing. From the point of view of the Payments Council, we are open to whatever model is most effective in terms of fairly sharing costs and encouraging competition. This has obviously been debated regularly at both the account switching board and quite recently the Payments Council board, but Gary can give you a very up-to-date statement of where we are.

Gary Hocking: We have been comparing this, and we also need to take into account that it will be very much cheaper to switch accounts in the future than it is today. Currently, the administrative cost of switching accounts between banks varies from bank to bank, but it is about £50.

Q3136 Baroness Kramer: That is interesting, because the banks I have talked to said that they reckon it is under £1 to switch today.

Gary Hocking: That is the cost of moving a standing order or direct debit. I have seen that figure in the public domain, and it is just one very narrow part of moving a current account. The admin cost at the moment is roughly £50. If volumes stay as they are today, the average cost of switching a current account would be £12 in the future. It will be very much cheaper in the future than it is today.

Q3137 Baroness Kramer: At the moment, it is shared cost. Is that correct?

Gary Hocking: All banks will still have costs. We are talking about the cost of the central system.

Q3138 Baroness Kramer: Yes, the cost of the central system today. Or are you saying that there is no central system functioning today?

Gary Hocking: There is a central system for moving standing orders and direct debits. The way that that cost falls varies. It is always the bank that initiates the process that pays.

Q3139 Baroness Kramer: You understand where my concerns are coming from. We cannot get away from the fact that that you are owned by the banks, which are most likely to lose from this system. That creates a certain incentive to see a fairly ideal little barrier.

Gary Hocking: Nevertheless, today a bank that is acquiring a new transferred current account is paying an admin cost of roughly £50. In the future, it will be roughly £12. That has to be good for competition.

Gary Hocking: I stress that the main point is that the process for quantifying sharing the cost is something that continues to be debated at the account switching board. It will come back to the Payments Council board if the issue were not resolved. At the account switching board, all participants in the programme are present and all have an equal vote. To put it simply, the larger number by definition are smaller banks rather than larger banks. The idea is that there is an agreement at that level, but if it were not agreed and still being debated-I know it is still being debated-it will come back to the Payments Council board. We do not want any barriers to a successful take-up by challengers.

Q3140 Baroness Kramer: That would be a real concern. Presumably, we shall all in our various capacities be watching. It would be so frustrating to initiate and advertise, and then find that a new barrier is operational.

Andrea Leadsom, in giving evidence to the Commission, described the IT systems of the incumbent banks-and I suspect that she would have said the same thing about the IT systems that are used by the Payments Council-as being like Victorian sewers. What is your view on the standing of the technology that we have in our banking system today?

Adrian Kamellard: I speak as someone fairly new to the industry. I have been in it for less than a year, so I have had to ask a lot of these questions myself. Certainly the infrastructure that supports the central payment systems is very robust. The simple measure there is that throughout the banking crisis and through all the pinch points, the payment infrastructure has worked, full stop. That is to its credit. I have made a point of going out to the various installations and data centres, and they are frankly very impressive. There is a lot of investment to make sure that the central infrastructure is robust. At that level, I am actually quite comfortable that it is-

Q3141 Baroness Kramer: But one way to have a very robust system is to avoid any innovation. Is that the mechanism that is essentially being used? You can have a very robust system if you very rarely innovate.

Adrian Kamellard: I have to break that question down into two parts. The first comment that I would make is that I know there is a lot of debate about how to effect greater levels of innovation. On account switching, whether it is the only one in the world I cannot say, but it will certainly be a world-leading service. Mobile payments, a service that will go live next spring, will be, on an international basis, the first national interoperable mobile payment service. Faster payments is probably one of only eight examples in the world of something so speedy and robust.

The point that I am trying to make is that there is significant and, you could argue, substantial innovation in the centre, but a lot of the innovation quite rightly happens in the competitive space. The challenge-I think this gets to your point-is to what extent the central infrastructure is helping foster innovation or impeding it. On mobile payments, it is eminently feasible-we are providing additional overlays to the existing system and delivering innovative services-but we also need to look into the longer term. To revert back to the payments road map, what we need to do under that is look at the possible infrastructure end states for the industry and, among other things, understand what will spur innovation and what will impede it.

On the comments from the OFT, one valid point about a single utility, for example, is that we need to understand whether, if there were to be a single utility, that would make it inherently easier to innovate or not. The answer comes out of the definition of it. You have to define different infrastructures much more precisely. Some you will immediately rule in because you believe you can launch products more quickly; that is probably the test. Some you will rule out because they would delay.

The current system does not prevent innovation-we are innovating-but there is a valid question about what we should be doing in the longer term. Can we make it easier?

Chair: One quick question.

Q3142 Baroness Kramer: I was going to ask about the common utility and the issues. Going to Andy Haldane, we begin to see the father of the common utility. From a technological, Payments Council perspective, some of the key issues raised have been data protection, ID fraud and so on. As you start to look at it, is it a technological issue? Can the technology manage those issues in a way that means that they are not barriers to a common utility?

Adrian Kamellard: I think the way I need to answer the question is this. Unsurprisingly, I have been reading a lot of commentary on different end states. That includes the single utility, account portability and account number portability. In terms of the single utility and the comments made by Mr Haldane, we definitely need to progress a definition of what that might look like. To answer your question properly, we need to define it. In a single utility, is it consolidation of the payment systems, or do you bring accounts into the boundary? If you do, is it just current accounts, or do you of necessity need to bring in loan accounts, savings accounts and things of that sort?

For me, we need to start with a service definition and an operating model. The technology is a critical but second-order issue. You have to answer those first. In that, it might become apparent that it meets a range of public interest issues. These range from making it easier to resolve when a bank is failing through to making it easier to innovate or making it easier for new competitors to connect to the system without having to carry a large cost because of a very expensive system that requires amortisation. I do not want you to feel that I am dodging the question. My answer is that we need to define it, and that is what I see us doing under the road map along with the other end states. Then we can say, ultimately, once we figure out whether it is going to meet policy objectives, "Is the technology doable?"

Q3143 Lord Turnbull: In addition to people who want to switch accounts, there is, in my view, another category of people who are dissatisfied with the present system, namely where a family takes power of attorney over the affairs of an elderly relative. You do not want to change the accounts, but you want to change who controls the account and where the information goes to, and I can tell you that it is a nightmare. I wonder whether you have addressed that issue at all.

Adrian Kamellard: The simple answer is that we have not gone into that specific issue in depth. It strikes a real chord, because what we have been designing under the national payments plan are areas where we need to get a much better handle on the practical problems faced by people who suffer problems. You describe a particular one really well. For example, we have done quite a bit of work for individuals who have carers, where they need to have scope for the carer to spend money but still keep control over their money. We are currently doing work on areas where you need dual authorisations, which is particularly relevant for small charities.

With the problem you describe, what I need to do is to take that away and confirm whether we have done anything previously. If we have not, I suspect that that is something that we would need to add to our list and do more research, but I would be very willing and keen to do so.

Q3144 Mr Love: The Treasury recently carried out a consultation on the UK payments industry, and it came up with three alternatives for the future: one, further reform along the lines that the Payments Council is doing; two, a public body to set the context; and, three, Paycom, as recommended by Cruickshank in his original report 10 years ago. Which one of those do you prefer, or do you not prefer any of them?

Adrian Kamellard: We have responded to the Treasury consultation, and what we recommended has two key elements. The first is that we implement, as indeed we are, an overhaul of our governance on the back of a review that was undertaken by Professor Martin Cave earlier last year. We have already significantly strengthened the hand of our independent directors, and we have significantly strengthened the relationship between key forums, including consumer forums and business forums, with how decision making is undertaken. That is something that we will continue to proceed with. What we proposed additional to that is that within the Payments Council structure we establish a new senior body. On the senior body we propose that there would be public sector representation in the form of the Bank, the FCA and the Government, probably in an observer capacity.

Q3145 Mr Love: So you are, roughly speaking, suggesting ways in which they might undertake option 1, if I may put it that way. It is an amendment to what the Government is suggesting. I am sorry to press you, but our time is limited.

Adrian Kamellard: It is best characterised as a hybrid of options 1 and 2. I actually want, and I think it would be a thoroughly healthy thing-if you look at option 2, they are proposing a strategy board. The main thing we are proposing is to establish a senior board, which would hold the Payments Council to account for the application of the public interest test in its decision making. That board would have senior public sector representation of all key stakeholders, joined by independents and a small number of senior representatives from the Bank.

Q3146 Mr Love: That is very helpful. The Treasury report highlights the benefits that the introduction of a payments regulator would bring, and it talks about ensuring that "open access to payments systems was maintained; pricing was transparent and efficient; industry governance was adequate and fair trading principles were respected." Can you deliver, in your alternative proposal, those four benefits as a regulator could?

Adrian Kamellard: Going through each of those points you have just raised, we are already taking practical action on access to payments. I will try to give you a real-life example. We convened a meeting-a workshop-of challenger banks and existing agency banks, as well as Government Departments that specifically have the issue of access to payment systems. We know that it is a real concern, and it is a concern to me. We have already identified a range of practical things that we can do to deal with concerns raised by the challenger banks. We will continue to see that through in the work that we do through the schemes and with the new group that we want to establish to regularly engage with challenger banks.

Q3147 Mr Love: Let me stop you there. The OFT has raised a concern, which was in the original Cruickshank report, that the payments system is still under the control of the major banks. Will that change under your proposal?

Adrian Kamellard: It will change. It has already changed, because of the way in which the Payments Council itself makes decisions. It is transparent and will become more so, not least with the advent of the road map. So all the changes that we see for the future in the payments infrastructure, including the systems, will be in the public domain with stakeholders involved in that process. The way we make decisions now is a matter of public record, and the role of independence is strengthened. We have people such as Clare Spottiswoode, who I know spoke to you in another capacity earlier, Gerard Lemos, Stephen Locke and Mike Alexander, as well as an independent chair.

Further, in each individual scheme there will be independent chairs and directors introduced over the next few months into those schemes. That is a new development. From now on there will be independent scrutiny at every level of key decision making, which simply was not there before.

Q3148 Mr Love: We have received evidence from some of the challenger banks that the agency agreements do not work in their favour. They are at a disadvantage to the major banks that control the payments system. Can you run through with us how the agency system works and how you create a level playing field so that the challenger banks can feel that they are getting equal treatment through the payments system?

Adrian Kamellard: In terms of the specifics of an agency relationship-that is, what is under the contract-I would not want to pretend that I know at a contractual level what those look like, because those typically are bespoke commercial relationships between a bank and the agency bank. But what I can say very clearly-this came out of the session that I ran-is that challenger banks are concerned about having enough information about when and how they should become directly connected to the payments system, as opposed to going through an agency bank.

Secondly, they are concerned about whether they get good enough information about developments in the payments system. Are they at the top table when developments about the payments system are being undertaken? Frankly, they want to be there, and some have expressed a concern that historically they have not.

The third was a practical thing. When you are going through an agency agreement and you are going through another bank’s platform for payment services, the challenger wants good information about things as simple as maintenance windows, so that the challenger bank can overlay their maintenance with the agency and therefore maintain high levels of service. I would not want to pretend for a moment that that then addresses all issues.

Q3149 Mr Love: There is one issue that you have not touched upon. I understand how important service is and being able to have confidence in the system, but the acid test, as always, is that the costs that are being charged to the challenger bank are the costs incurred by the agency bank. If that is not the case, they are at a competitive disadvantage. How do we ensure that that is transparent and open and that the industry can be reassured that the agency agreement does not institutionalise disadvantage for the challenger bank?

Adrian Kamellard: What would not be addressed in the model we have proposed is specifically opining on the level of pricing. That much would be clear. What we have not explored yet-to be honest, we have not yet got to that step in the process-is what role the Payments Council should have in terms of the transparency arrangements. We have simply not got to that point yet. We had an initial meeting towards the end of last year. We identified some practical things that we can do now.

The other things that struck me in that work and also in the discussions that I had with individual banks is that they are not a homogeneous group at all. What is important to one challenger bank can be quite different to another. We need to better understand what things we can do that will have the greatest impact across what is a fairly heterogeneous group.

Chair: Just one quick question.

Q3150 Mr Love: I was going to ask about the four licensed conditions that Paycom would implement. Could the Payments Council tell us in writing how they are addressing each of those?

Chair: Yes, that would be very helpful. Would you be prepared to do that?

Adrian Kamellard: Yes, of course.

Chair: Thank you very much for coming to give evidence. I am sorry it is somewhat abbreviated, but we are taking a great deal of information in over a short period.

Adrian Kamellard: I appreciate the opportunity. Thank you.

Examination of Witnesses

Witnesses: Professor Robin Bloomfield, City University London, Fiona Brownsell, Director, Tusmor, and Ben Wilson, Associate Director, Financial Services Programmes, Intellect, examined.

Q3151 Chair: May I begin by asking you to provide a necessary level of transparency about any financial connections you may have to any of the advice that you are about to give us? Going from left to right, as I am looking at you, do you offer any advice for which you are remunerated on any of the issues that you are going to talk to us about this morning?

Professor Bloomfield: As well as being an academic, I run a consultancy company and we provide advice on high-hazard industries, such as the medical sector. We have done some work in the financial sector, but a very limited amount. I have done research funded by Foresight, I have done work with the Bank of England on systemic risk and I have had partners in other research projects. In particular, a number of years ago, we looked at why the payments system was so dependable. That involved both mathematics and ethnography, and was fairly far-reaching.

Q3152 Chair: Will you be looking to offer further advice in the future in this field and on the issue that we are discussing here, which is the platform?

Professor Bloomfield: My area of expertise is whether we can trust complex computer-based systems, so that is an area that I will continue to work on, yes.

Q3153 Chair: Fiona Brownsell?

Fiona Brownsell: Tusmor is a consultancy. We provide advice, information and help to new entrants to the market, the vast majority of whom are unfunded, so we basically do an awful lot of work for nothing. We have also put in an application to ABCO to work on the credit union expansion project to build a common technologies platform for credit unions. We do not know where that stands; it is just an application.

Q3154 Chair: Mr Wilson?

Ben Wilson: Intellect is a commercially neutral trade association. Our funding comes from our members, which are the technology companies. We do not take any money from banks, apart from a couple that are associate members; but they do not really work in my field.

Q3155 Chair: So you would not expect to benefit personally in any way from the advice that you are going to give us today?

Ben Wilson: No, not at all.

Q3156 Chair: I do not mind who picks up this question first-maybe whoever thinks they are best qualified-but could I ask for some clarification about the technology? Andy Haldane talks about a common utility platform, while Intellect-maybe I should start with you-refers to a central utility platform. What is the difference?

Ben Wilson: Essentially I can see no real difference. The principles are the same, and it is hosted in the centre. Deutsche Bank also talked about the common utility platform, back in September. It is a means for banks to share non-competitive elements of their systems so that they can perform the same function.

As was in the written submission to the Committee, an awful lot of money is spent by banks on systems that, to all intents and purposes, duplicate what other banks do. There might not be a huge competitive element in that. A central utility, such as the one that Intellect put in its paper-it was about a year and a half ago, now-could be run by a different organisation, such as, say, the Payments Council.

Q3157 Chair: Let us come to the regulation of it in a moment. Just to clarify at a technical level, you are saying that, as far as you know, Andy Haldane is referring to a central utility platform, and those phrases are interchangeable?

Ben Wilson: I think they are interchangeable. I know that there was talk about it in the session before, but until there have been more accurate definitions as to what, for instance, an account portability solution would be-is it part of a wider central utility or is it part of a core platform-

Q3158 Chair: What do you mean by "full account portability"?

Ben Wilson: That depends on how far you want to go.

Q3159 Chair: By comparison with a common or central utility platform. For the latter you must have a clear idea because you are proposing it.

Ben Wilson: We are proposing it as an alternative to what is there at the moment; we are not saying that you should or should not do it. The way that we proposed it is that an account portability solution would form part of a broader central utility that could also facilitate a mass migration of accounts in the event of the failure of a bank. To all intents and purposes, I do not think that there is that much of a difference. A central or core utility-whatever you want to call it-is in the middle where there are elements of bank systems that are held among their own currently, but which can be held centrally and shared among competitors, leading to reduced cost and quicker innovation.

I am happy to cover that as part of this session, but one of the challenges-you mentioned it in the earlier session-to innovation is the fact that the infrastructure that underpins banks is very complex and very hard to change. When decisions are made about whether change should be made, in many cases that change is not made because of cost.

Q3160 Chair: To go back to the beginning of your reply, are you telling us that a central utility platform is required to deliver full current account portability?

Ben Wilson: Again, this is just the approach that Intellect proposed as a vision of the technological art of the possible. That was not whether it should or should not be done, but whether it could be done. It involved a central utility.

Q3161 Chair: I am asking you about what could be done.

Ben Wilson: It could be done as a central utility.

Q3162 Chair: But it need not.

Ben Wilson: That is not something that we have explored. For full account portability, if you are basing it on something that is quicker than seven days, it will have to be a central utility.

Q3163 Chair: Do you need a central utility platform to achieve full current account portability? That is the same question that was asked a moment ago, but I want an answer to it.

Ben Wilson: From the work that Intellect has done, we would say that it is probably the case that a central utility would provide the best means of account portability, but there may be other ways of doing it.

Q3164 Chair: I will come to others in just a moment. We have started so we will finish, as others say on certain programmes. Does the Lloyds proposal bear any relation to the central utility platform?

Ben Wilson: What is the Lloyds proposal, specifically?

Q3165 Chair: The Lloyds proposal, as I understand it, is a shared database of accounts and former account information.

Ben Wilson: The very fact that it is a shared database suggests that it is in the centre. It is one of the key issues-it is probably just a different iteration of it.

Q3166 Chair: But you have not been in contact with Lloyds about this.

Ben Wilson: This is something that we produced a year and a half ago. We have moved on from it in the work that we have been doing. We produced a concept that could be used.

Q3167 Chair: I am going to bring in the other witnesses. Fiona Brownsell, what would you like to add? You can answer any of the questions that I have posed, although they are pretty much all the same question.

Fiona Brownsell: First, I will tell you about me, so you understand where I am talking from. My degree 30 years ago was accountancy and computer science. I have 30 years of working on technology.

Q3168 Chair: I am terribly sorry to ask you to speak up again, but I can only just hear you. It is the acoustics of this room.

Fiona Brownsell: I did my degree in accountancy and computer science 30 years ago and I have been working in technology since then as a practitioner. I started as a programmer and ended up as a programme director, who implemented two new banks, one of which was Metro Bank, from the technology and operational standpoint. I have looked very closely at this issue, and I have felt a great deal of pain sometimes trying to make it work.

My concept of what would be best for Mr Haldane to implement is a common platform for the payments side, because payments live outside of the actual banks themselves. The banks all fire transactions in somewhere. It is a closed loop; the transactions go between banks. They are in the middle and the banks are a ring round the outside and the customers are a ring round the outside of the banks. I would support that, because we currently have a big number of schemes that ultimately do the same thing-they move money from one account to another account. I do not know why we have got four schemes and why they all have to be so different.

On account portability specifically, with the new switching process, where they have put in the redirection piece simply with a customer lens on it, that achieves complete portability overnight. All your transactions will follow you. The ones that went to your old account will go immediately to your new account. The seven days are not about what the consumer gets; the seven days are about the banks sharing information about those customers’ transactions with each other. That does not need to be done in seven days.

The customer is happy overnight, because everything is going to their new account with redirection. So it is actually more efficient than mobile phone account portability, because you have to wait for your SIM card to arrive before your new phone works on your new account.

Chair: I think you have some notes in front of you there, suggesting that you have come with some thoughts that you feel you really must unload in this meeting.

Fiona Brownsell: Quite a lot of different things.

Chair: Is there something pertinent to the question that I have asked, or do the points relate to other questions? If there is not, I will move on to Professor Bloomfield.

Fiona Brownsell: Perhaps we should stick with that.

Chair: Professor Bloomfield?

Professor Bloomfield: What you have before you are a number of vague visions and some speculation about common platforms. The thing that is lacking from my point of view is the consideration of systemic risk and what that does. It is very hard to say whether they are feasible or good ideas unless you know what the impact on systemic risk is going to be. As we know, systems develop and grow and they are not static. This is a question for now and for the future.

It is not just a technical issue. There is certainly a need for technical methodologies that provide you with some evidence of what the systemic risk would be, but it is a political question about what the appetite and tolerability criteria are for systemic risk.

If you look at other high-hazard industries-I work in nuclear and medical-there are fairly clear discussions about what is acceptable, what is tolerable and what is disproportionate improvement. I find it very hard to get to grips with any of these proposals as to where we are heading-if the pound in the pocket becomes a pound in the cloud, it suddenly disappears.

Q3169 Chair: If you do, we certainly do. From where I sit, it seems that there is-correct me if I am wrong-a broad question about maintaining the integrity of the payments system. A subset of that is how best regulators might need to use the payments system to facilitate resolution, thereby strengthening the appearance of the reliability of the banking system and diminishing the implicit guarantee. Thirdly, there is the benefit to the consumer from increased switching. So there are three pegs to what we are trying to achieve from an improvement to a new payments system or a new payments system. Is that correct?

Professor Bloomfield: Yes, I think I agree with you there. However, account switching is perhaps an example of the type of changes and innovation that you are seeing. If one took that as just one thing that is happening, I would see that there is a trade-off between centralisation, speed, provision and more services and the systemic risk. I do not see that trade-off being discussed anywhere at the moment.

Chair: I am not sure how far we are going to get in this session, but we are going to keep going just for a bit.

Q3170 Mr McFadden: I want to talk about risks. One of the most basic psychological relationships that we have with a bank is the issue of the safety of our money. It is not just convenience; there are obviously agreements in terms of direct debits and the payments system in the way that we use it, but there is also this idea that our money is safe.

Safety has more than one aspect to it. Leaving aside the huge and very relevant question of a bank collapsing and the deposit insurance schemes and so on-that is not the kind of safety that I want to ask about-it is safety from others and the fact that it is there, held by the bank, but it is ours and only we have access to it. That is a very important psychological relationship with our bank.

As technology experts, instead of having each system owned by the banks and them co-operating with one another to a degree, which is what we have now, what do you see as the risks of having a common plug-and-play system? As a lay person, I see this as a black box with all our bank details in it, where bank A can come and plug and play, as can bank B, and things move seamlessly between them. But I think people will ask, for example, "How secure is my money and payments in a system like that, in relation to things like fraud, identity theft and security of our details?" Do you have any reflections on that?

Ben Wilson: It is certainly a risk, as there is anyway with any central repository of information, of which there are many in the UK. Cyber-attacks are becoming more and more advanced. Banks are fighting a constant battle to try to keep people who want to gain entry to their systems at bay.

It is an ongoing issue. You create a central repository for data, and it is another thing that needs to be defended. You are constantly going to be fighting against people who want access to that information, both internally and externally-the fraud element that you mentioned as well. That needs to be taken into account when deciding whether it is a feasible option. There is no way of sugar-coating that.

Fiona Brownsell: When you implement technology, as a bank owning the customers’ details-if I step away from the payment systems-there are very high standards that you are held to, and banks quite rightly are. The technology departments have huge security, always looking to not be hacked. That is not to say that it can never happen, but they all do, and the standards are very high-the same as in any other industry.

I personally would have a concern with customers’ details being in a central repository as opposed to just the payments, simply because I think that that would reinforce and make even worse the current sluggishness to sort asymmetries of information for customers and to just provision good-enough services to customers. All banks would just end up with the same ability to serve customers identically, whereas if you are properly innovative with your communications to your customers, and you start sharing information with them, that is where we believe challenger banks would have the edge on existing banks. You would remove a competitive element from small banks by centralising it.

Q3171 Mr McFadden: So you see that as a downside in competition, as well as the issues I am raising?

Fiona Brownsell: Sorry. I hope I haven’t inferred that. Quite the reverse.

Mr McFadden: Sorry.

Fiona Brownsell: I think it is better if banks compete on service. If we can level the playing field on cost, and banks can compete on service, you would have a reason to switch, which today, frankly, you don’t have.

Q3172 Mr McFadden: Professor Bloomfield, do you have any thoughts on the security and safety aspect?

Professor Bloomfield: Yes. I have two thoughts. Obviously, it all depends on the detail, but generally, losing diversity and centralising things increase risks rather than reduce them. They also increase perhaps the small risk of something large happening.

Q3173 Mr McFadden: António Horta-Osório, the chief executive of Lloyds, has talked about a single banking platform setting up a single point of failure. When we had the Natwest problems some months ago-maybe a year ago-those who were not Natwest customers were not directly affected. But if something like that happened in a big black box where everyone’s details were, the potential effects would perhaps be greater.

Ben Wilson: There are threats now. Operational risk is also a systemic risk. In the way the financial system operates, there is no difference between a bank not being able to operate because of a systems failure or being hacked and the risk of a lack of liquidity. It is a knock-on effect-these banks are interdependent. So yes: centralising something creates an additional risk, but the risk is there at the moment. This is an infrastructural issue-that it isn’t fit for purpose.

Q3174 Mr McFadden: The reason why I am asking these questions is that if I was a bank-perhaps this is a little bit sceptical and even cynical of me-and I wanted to resist this proposal from Andy Haldane or full account portability through a mechanism like this, I would not be saying that it costs too much or that it is too complex technologically, because I do not think that people would believe me; it would sound very self-interested.

I would say to the customers, "Do you really want all your details in this central database, which the other banks have access to? Is that really what you want?" I would talk up the risks and vulnerability of a central system as distinct from a diverse system. The question I really want to ask you as technology experts is: is that special pleading, or is there merit in such an objection?

Ben Wilson: It is a realistic objection, but, then again, do we have issues with the DVLA holding all our information as well? I think it is part of the broader weighing up of "Is it desirable?"

Again, from the perspective of the technology industry I would suggest that it is part of this bigger picture. Account portability cannot be taken just as this one fix-all, silver bullet issue; it needs to be taken as a broader issue of looking at this infrastructure. Is it fit for purpose? Can it serve the customers in the first place? Is it secure enough? Is it resilient enough from operational failures? I think that is part of the bigger issue that needs to be considered.

Safety of customer data is always going to be a primary concern. I think, yes, from what you are saying, if the issue is "It is too difficult, therefore-can’t do it," that is not a great reason not to do it. It is feasibly possible. It is possible to do it. Is it desirable? That is a question for others to answer, I think.

Professor Bloomfield: Single points of failure, of course, are a very serious concern, but just because you have got a single service does not mean you do not have diversification underneath-does not mean you do not have diverse networks, diverse systems, diverse geographical locations. So, although conceptually it could be seen as a single point of failure, one would assume that the engineering of it would be that it would provide a similar resilience to the disparate services that we have at the moment. That would be part of the engineering of it.

Q3175 Baroness Kramer: When we heard the Payments Council a few minutes ago, we heard the sort of thesis that, in fact, technical innovation in the UK banking system is quite effective, pointing to faster payments and the fact that a mobile banking system will be coming in. Is that your perspective on the system that we have now, or are you more in the Andrea Leadsom Victorian sewer infrastructure court? Let me ask that first, and then I will follow on, if I may.

Ben Wilson: Obviously, Faster Payments is a great system. It works. It has delivered benefits for the banks and for the customers. If my memory serves, the banks had to be dragged kicking and screaming into it, in the first place, but there were benefits derived from it.

The infrastructure-again, this Victorian sewer analogy: it is the plumbing. The thing here is the plumbing of each individual bank. It is hard to change. It is very hard to change. It is complex. It is layer upon layer of systems that have been built up on each other for years and years. It restricts innovation, because it is very risky to change. It is very time consuming and very complex to change. I think I mentioned in our submission, roughly-different commentators have got different views on this-between 70% and 90% of all costs are spent just keeping the lights on in banks, of all IT budgets. That is a lot of money. It doesn’t leave much for innovation. When you think of that 20%, let’s say, that is left; 80% of that is spent on implementing regulation. So extrapolate all that: you have got 4% that is there for implementing innovation, for improving the customer service. That is not a lot compared with what else is being done.

In terms of how you improve that, you see some very good innovations: Barclays Pingit-brilliant. That was implemented in seven months; but if you think about innovation and how long it takes to change core systems, it can take anything between two and four years. A lot of these innovations require that. So if you were to roll out something, say a contactless card, and it takes a couple of years, as many banks have done, at the point of its being rolled out, people are already thinking about mobile payments, and that being rolled out.

Is it taking far too long to roll out innovation, and is it therefore a brake on actually implementing innovation, because it would take too long and cost too much, and offer too much of a risk? I think, due to the sheer weight of regulatory pressure that banks are under at the moment-and they are-and the cost of it, that is stopping them being able to innovate as much as they probably want to.

Q3176 Baroness Kramer: Do the others agree with that?

Fiona Brownsell: Sorry, not even close. American Express, where I worked for eight years in technologies, managed to innovate constantly and do both sides of the transaction, from the merchants and the consumers, and it operates at a much higher volume than the current combined efforts of the UK systems. If the big banks have elected not to go back and do effective maintenance over the past 20 years, which is why prices are so high, I do not think it is incumbent on any of us to recompense them for that. I believe that, if we can do something around a platform, which is what we are trying to achieve, whereby the new entrants can be sped to market in six months, we will see more customer-based innovation, and more customer service innovation, for a fraction of the cost. The Payments Council says £650 million-that was the number I saw, at least-for switching, which is good in that, from the customer point of view, it is there over night. However, Metro Bank could have been launched six more times for the same money. Set against that, the outcome for that investment is tiny.

Q3177 Baroness Kramer: When you use the term "common platform," are you arguing for the kind of common utility or common platform that Andy Haldane argued for? Or are you basically saying that we need to have a lot of different potential common platforms from which individual banks could choose, so it is not a single system but a development of a common-platform concept such as you see primarily in the US?

Fiona Brownsell: I would hold Mr Haldane’s platform at payments only, and the banks outside that have their customer management and customer service platforms where they hold all their customer information. To Mr McFadden’s earlier question, when I have spoken to the FSA about the possibility of joining up all the technology once and then rolling multiple little banks on it, they were very clear that we had to have hardware barriers between the individual small banks so that no individual customer’s data could ever bleed across, managing exactly the risk of lumping everything into one great big database. I would maintain the distance. Payments is one thing; banking and customer service is another. Payments is a utility in my mind, not banking.

Q3178 Lord Turnbull: What ownership structure do you think those who are advocating a central utility have in mind, and why is it any different from the payments system or what we have at present: the banks?

Fiona Brownsell: I would agree with you. I strongly promote competition, and I would like to see hundreds of community banks up and down the country slowly but surely bleeding deposits and current accounts away from the big banks to bring them down to size.

Q3179 Lord Turnbull: Would that be accelerated or retarded by this central utility?

Fiona Brownsell: It would be retarded, because it will take five years, and then it won’t work.

Q3180 Lord Turnbull: Right. There is no sense that there would be any public sector involvement?

Fiona Brownsell: Right now, the Payments Council is the biggest barrier to true innovation. They are innovating only in the mobile space because they also want us not to pay cash for our cups of coffee; they want that money to go through their systems, too.

Q3181 Lord Turnbull: If we look back on the great technology wars, such as VHS versus Betamax, I do not find very attractive the idea that someone plumps for one of these and we are landed with it for generations, particularly as in many of those cases, in retrospect, the wrong option was chosen. Central utility seems to me to be a recipe for putting all your eggs in one basket and regretting it afterwards.

Fiona Brownsell: I couldn’t agree more, Lord Turnbull. I believe only payments is a utility. That bit is just moving data between banks.

Q3182 Lord Turnbull: How far are we from that with the various systems we have at present?

Fiona Brownsell: With the Payments Council, I would be looking at governance, ownership and those types of issue, but they are currently a utility. All payments go through one or other of their schemes.

Q3183 Lord Turnbull: Only 20 minutes ago, they were telling us that they had changed the governance and there is more of a role for independent members. There is some new kind of supervisory board. I think the chairman may be the same person who chaired the cheques debacle. The question is whether they have changed enough to be an organisation that searches out new technology, as opposed to looking for a comfortable life with the technology they have.

Fiona Brownsell: They will constantly search out new payments technology, and that is what they are doing. The innovation that I see and hear from the small banks is much bigger than just payments. Besides, they may have a change of approach and culture, but there is no change in ownership. The main clearing banks still own the entire payments sector.

Q3184 Lord Turnbull: So, again, we want to be careful not to entrench the incumbents further-that is the way I would summarise it.

Fiona Brownsell: Yes.

Q3185 John Thurso: I have just one quick question, as a sort of follow-up to that question. If I am right, it is VocaLink that provides the payments service, and I have been out and visited its huge database, which is very interesting. If we were to look at the analogy of other utilities-be it water, electricity, gas or whatever-you effectively have a central system and nobody today would think that competition would be best served by building another grid, or another water system, or whatever, because that is not actually where we want the competition to exist. But on the other hand, we encourage a great plurality at the rural end, and what we need to ensure is that, whatever the particular utility is, at the customer end they are able to get an easy choice and plug into the main utility. I know this metaphor would break down if you pushed it too far technically.

So what we are really saying is that you have a core transmission utility that enables, and then you have a market that operates, so that what is required technologically is one set of people innovating on that system, and you have got the big companies that sort out that system, and the other bunch of people, which in this case is the banks, and the critical thing therefore is the ability for the bank technology at that point to speak effectively and efficiently to the main system. So, No. 1, have a main system, and No. 2, have the ability for common-speak. And then what you are saying is that No.3 is to allow each bank to develop its own software in that limited space in such a way that it competes, because if its software is better, and it offers a better service, that is all part of the competition.

Very quickly, is that an accurate summary of what I have been hearing as your fairly common advice?

Ben Wilson: Yes.

Fiona Brownsell: Definitely.

Q3186 John Thurso: The question then on portability is this: at what point is there the difficulty for portability, and what should we be looking at to try to improve it?

Fiona Brownsell: A picture: if you imagine the payments bit as the central circle and then there is a circle around the outside, which is the banks-all of them on a level playing field, which we are not on today-and they all have the ability to send information to another bank. It is a payment and if that payment bounces they can send that information back, so they are currently connected in both directions, each of them to each other, through this payments thing.

With account portability, once you have got the actual redirection, your stuff is following you, but you need your standing orders sorted out, your direct credits and so on. I can see a major innovation for customers if those same channels that currently go two ways were used by the bank that you are shifting from, or even if they sent the information to your new bank, we could technically and feasibly push that information out to all the other banks. So, if Baroness Kramer was sending me a standing order, as long as the bank I was leaving told my new bank her sort code and account number, they could send a message to her bank to say, "Let Baroness Kramer know we’ve replaced Fiona Brownsell’s old account number and sort code with her new ones, so the payment will continue without any difficulty." They have got the channels; they need to use them, and then the whole thing could be automated.

The current system-that is for seven days-puts a huge amount of pressure on the new bank, because all the current communications go round the outside. So the new bank has to contact all the companies and so on directly, to get your direct debits shifted and that sort of thing. So I think they are missing a trick; there is a bit they could do in the middle that would take the pain away.

Q3187 John Thurso: When one of our panels was in Birmingham, we had a consumer event and we went round various tables and talked to people. I mentioned this idea and asked people, "Would you consider changing your bank?" The answer was, "No, it’s too much hassle." I said, "Hang on a minute, you know that you can change your phone quickly; if you could do that would you change your bank?" They said yes. There is clearly an issue there. That was pretty unanimous. It seems that getting the technology right is the difficulty.

You mentioned in your submission that new entrants have to get agency services from one of those who are BACS members. Why? Why cannot a new entrant plug into the system? What should we be doing about it?

Fiona Brownsell: We could. When you want to do that, you have to go to the Payments Council and look at the various schemes, which all have high volume-related, money-related, triple A credit rating-related entry criteria to become a member. So if you cannot become a member because you are too small, you have to go through an agency bank. There is no other route in.

Q3188 John Thurso: Presumably we would not want new entrants who might have question marks about them. That is a reasonable way to go. But equally, on the other side, you might argue that, if you have got through the FSA’s complicated licensing, you are kind of there by default.

Fiona Brownsell: I would argue that.

Q3189 John Thurso: We are discussing the volume of money, more than anything else. It is not actually the security side of it, is it?

Fiona Brownsell: I would have thought so. Part of why P2Ps would like to be authorised is that that would be an additional help to them.

Q3190 John Thurso: That point came through in several submissions. Would the other two witnesses like to mention anything on that? Have I missed anything out?

Ben Wilson: Nothing on that.

John Thurso: Okay.

Q3191 Chair: Prime Minister’s questions are coming up at any moment and we have been going for just under three quarters of an hour. Can I ask all of you to write something down for us, in two parts, that would be of help to the Commission? Part one would be a short description of the main characteristics of each feasible proposal for reform of the current system. You can express a preference if you want. This is just so we can get past what appears to be-never mind a common platform, we need common terminology to start with. Secondly, could you identify for us any other advanced countries that have platforms or payment systems from which we have something to learn, and briefly say why?

I am sorry that you have not been given as long as we would normally give witnesses in a parliamentary Committee or Commission, but we are pressed for time today. Thank you very much indeed for coming to give evidence. We appreciate it.

Prepared 4th February 2013